Wednesday, May 25, 2016

Schooling a US Ambassador About Free Trade

Don Boudreaux writes the Wall Street Journal:

Ambassador Donald Blinken thinks that the case for free trade is sound only if government ensures that trade “isn’t unnecessarily harmful to those sectors of the economy it negatively impacts” (Letters, May 24). He’s mistaken, for at least two reasons.

First, free trade is simply a particular manifestation of economic competition. It makes no more sense for government to give special assistance to producers who must adjust to changes caused by competition from new foreign rivals than it does to give special assistance to producers who must adjust to changes caused by competition from new domestic rivals or from new technologies. Indeed, if government adopts a policy of giving special assistance to workers and firms that lose jobs and market share to foreign rivals, inefficiently large numbers of workers and firms will be attracted into sectors that are especially exposed to international competition. One ironic result of this policy will therefore be an artificial increase over time in the number of domestic workers and firms that lose jobs and market share to foreign rivals.

Second, all that is needed to ensure that trade “isn’t unnecessarily harmful to those sectors of the economy it negatively impacts” is that trade be free. The reduction in domestic prices caused by free trade is supposed to push some domestic resources out of their older, less-productive lines of work and into newer, more-productive lines. Free trade (that is, competition) accomplishes this task by reducing the returns earned by resources in their older, less-productive lines of work. Contrary to Mr. Blinken’s presumption, however, there’s no reason or evidence to suppose that free trade causes these returns to fall further than is necessary to bring about the appropriate contraction of those domestic industries that should contract – and, thus, that makes possible the appropriate expansion of those domestic industries that should expand.